A confluence of trends in higher education are making student housing a potentially lucrative environment to park your real estate investment. While it’s potentially lucrative, it has its own unique mix of circumstances and setbacks, and you should be aware of them, and take measured steps into this market before sinking a lot of funds into it.
First, the positives: Across the country, university enrollments are increasing, and increasing fast. The children of the baby boomers, the so-called “echo boomer” or “millennial” generation. This is a generation that already represents one third of the US population, and spends over 170 billion per year of their own and their parent’s money, and they’re just cresting on their way through the demographic surge going to college. In general, an echo boomer is a child born between 1982 and 1996; we’re seeing the first wave of them head through school now.
While enrollments are up, a lot of state colleges are dealing with tighter budgets, and a greater demand in their facilities and spaces. With the growing demand for on campus facilities for activities and teaching spaces, they’re knocking down the old dormitories, while enrollments are rising. For schools without enrollment caps, the campuses are waiting for the private sector to pick up the housing slack, and it’s happening pretty quickly.
>From the perspective of a real estate investor, there’s a lot to commend this as an investment opportunity, even on the small scale, just buying a condominium for your college age student to sell when they graduate. First, housing demand in college towns is inflexible. It doesn’t wax and wane with the job market, local industries, or nearly anything else. Second, it’s a market where rent increases are expected nearly annually, so you can keep a solid cash flow going. Third, with a bit of scouting around, you can find the markets that give a near constant occupancy rate. That scouting is called searching out the “bed to student” ratio. By looking at the materials published by the university and its registrar’s office, you can determine the number of dorm room beds the university has, and the number of enrolled undergraduate students. Find out how what percentage of students have beds waiting for them on campus – if the percentage is 40% or lower, you’ve got a market that’s got solid demand campus student housing. Some campuses, this percentage can get into single digits.
Now, just because there’s a solid demand doesn’t mean it’s a prime investment opportunity. Look at campuses that are actively increasing their enrollment, like the ones in the southwest and southeast; a lot of students are going to school in the Sun Belt because of the climate. Second, while you may have a paper assessment of the demand for housing at a school, if that demand has already been met, then buying more rental property in a crowded space isn’t terribly wise; take some time to do some scouting around. Even more so, take the time to park your car on campus and do some scouting around on foot, and on the local bus system, to figure out where the places students hang out are, and where conveniently located housing “should be”. This will give you a good feel for what to look for in the local market.
Students want something within walking distance of campus. Other features that are considered essential are a place to park their car; covered parking is prized, especially on campuses in the Midwest and Northeast. Being able to get Internet access is important; talk to the local telco or cable provider to make sure that this can be added in.
Because this market is so specialized, bring in a professional to examine it with you. Start small, with a couple of condominiums, before trying to convert an old home into flats, or demolishing an older home to build an apartment building. If you’re buying a property in another state, by all means hire a local management firm that has experience with renting to students at the campus you’re supporting. If you’re buying an existing rental property, examine all the tax records, and hire someone to go through the facility with a camera taking pictures of everything – this will give you a good visual record of the state of the carpets, walls, paint jobs, etc.
Finally, send a survey, after each semester, to your residents, and find out what they’d like improved in the building. Student housing is competitive enough that being a “passive landlord” won’t cut it at all.